PayPal adds marketplace payments with $400m reach for Hyperwallet

PayPal has shelled out $400m for Hyperwallet to improve its ability to serve the wide variety of marketplace businesses – from Expedia to Uber to Amazon – that have emerged in recent years. Marketplaces are growing rapidly and have more advanced payment needs than the average e-commerce business given their global nature and multiple stakeholders that are part of the transaction. PayPal has existing capabilities in marketplace payments, in part through its $800m acquisition of Braintree in 2013, but lacked a holistic platform and advanced capabilities. The gap it created allowed numerous marketplace payment specialists to emerge and scale, including Stripe, Adyen and YapStone.

Hyperwallet, which was founded in 2000 and has roughly 200 employees, has favorable margins on international payments with strong growth. Most importantly, the target brings PayPal a robust payout platform that can disburse funds in various ways to marketplace participants in upwards of 200 countries. Coupled with PayPal’s 218 million active consumer accounts, this should create the basis for a unique and highly efficient disbursement offering. Hyperwallet should complement PayPal’s Braintree business unit, with Hyperwallet CEO Brent Warrington reporting to Braintree head Juan Benitez when the deal closes, expected in Q4.

At its May investor day, PayPal’s CFO emphasized the importance of inorganic growth for the company’s long-term strategy, laying out plans to tap its strong balance sheet and spend $1-3bn annually on deals over the next few years. PayPal has a favorable position in the market but is facing mounting competitive pressure, especially on the merchant side of its business, which has been hit hardest by some of the above-mentioned entrants. In recent years, PayPal’s merchant capabilities have begun to lag market leaders, creating obvious gaps in its platform. With purchases in the past 30 days of iZettle for $2.2bn (SMB brick and mortar payments), Jetlore (commerce software) and now Hyperwallet (marketplace payouts), the company has wisely chosen to focus its M&A budget on merchants in an effort to deepen and diversify its value proposition.

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Visa plays with virtual goods

Contact: Jarrett Streebin

This week marked another major entrance into the virtual goods market with Visa snapping up PlaySpan for $190m in cash. The deal comes a half-year after Google struck the first significant transaction in the market, paying a reported $55m for Jambool. With the market for social games and virtual goods amounting to real money, it’s likely that these giants won’t be the last buyers here.

We predicted these sorts of deals in our recent virtual goods Sector IQ. In fact, we named PlaySpan as one of the startups likely to get taken off the market. However, we matched it up with eBay’s PayPal. Our reasoning: PlaySpan would have provided an avenue to improved developer relations for PayPal, where it has struggled, as well as massively boosted its market share. Instead, credit card behemoth Visa took out the Santa Clara, California-based startup and it’s likely that PayPal will suffer as a result, particularly in its all-important relations with developers.

Consumers are becoming more and more comfortable not only buying virtual goods, but also buying real goods in games. This should continue to fuel the amazing growth in this emerging market. Both PlaySpan and Jambool are particularly well-positioned to capture this business because the back-end technology and security required for purchasing goods – even if they are make-believe goods – is incredibly complex. Most developers prefer to leave that to outside providers like Jambool and PlaySpan, just like online retailers left the transaction part of their business to PayPal for years. Given that Google and Visa have bought into this market in the past few months, it’s clear that virtual goods are here to stay.

Social gaming grows up

Contact: Jarrett Streebin

Having already seen massive consolidation within the social games development industry, a related area is beginning to be consolidated: virtual goods. A subset of the social gaming industry, virtual goods are one way that developers make money from popular games. Google recently expanded into this market by buying Jambool. Although it’s the first purchase by a major player, there are bound to be more deals.

This isn’t Google’s first play in payments processing. The search giant stayed in-house back in 2006 when it rolled out Google Checkout. The only problem was that it was already years too late to unseat PayPal’s market dominance. Now, Google knows better than to get ‘PayPal-ed’ in the virtual goods market. With Jambool, Google obtains a social payments processor for social media games known as Social Gold. Although a relatively small player within the market, it has one of the most secure back ends in the business, with a Level 1 PCI security rating. This, along with the fact that it has support for a number of international currencies, makes it a very scalable service. Since Slide Inc, the social games developer recently acquired by Google, isn’t large enough on its own to warrant the purchase, it’s likely that Google will continue to expand the Social Gold offerings to meet outside demand. Additionally, Google may have more social gaming offerings coming that could use the product.

The virtual goods industry has been on shaky footing lately. Ever since Facebook announced Facebook Credits, which threatens to make all virtual goods companies obsolete on that platform, many of the companies have been scrambling to diversify away from the social media giant. As of yet, Facebook hasn’t made its Credits mandatory, so there’s still room for other players. But with RockYou, Playdom and Zynga all having signed exclusivity deals, it’s likely that we’ll soon see Facebook Credits used across the board.

One company that has diversified beyond Facebook is PlaySpan, which has a broad range of products that cover many areas of virtual goods monetization. The Santa Clara, California-based startup just received another $18m in funding, on top of approximately $20m. The firm could very well become the PayPal for virtual goods. If it does succeed in that, we wouldn’t at all be surprised to see PlaySpan also get picked up by eBay, which acquired PayPal in 2002. (We’ll have more in an upcoming Sector IQ on virtual goods.)

Amex buys into the alternative online payments revolution

-Contact Thomas Rasmussen

As the first significant deal that adds online payments technology to a legacy payment platform, American Express’ recent $300m acquisition of Revolution Money essentially amounts to a shot across the bow of eBay’s PayPal and Google’s CheckOut. The relatively rich purchase of four-year-old Revolution Money also stands as the third-largest alternative online payments buy to date, trailing only eBay’s pickups of PayPal and Bill Me Later. We estimate that Revolution Money, which had taken some $100m in venture funding, was running at around $10m-$20m in sales.

The alternative payments market is both large and fragmented, and is likely to see substantial consolidation in the coming years. It is also a space that has had difficulties in establishing a coherent offering, with early efforts ranging from ill-conceived ‘sci-fi-esque’ biometrics offerings to SMS-based payment methods. Until recently, it has mostly been marred by failed startups, poorly executed acquisitions and fire sales. Nonetheless, thanks to the continuing success of PayPal and new alternatives (Google Checkout, among others), as well as the boom in online micro-transactions and an uptick in general online shopping, the sector is again gaining favor, particularly as a way to cut transaction costs.

Looking ahead, we believe Amex’s acquisition of Revolution Money will serve as a wakeup call to other legacy payments vendors as well as financial institutions that might now look to do some catch-up shopping of their own. This inevitable consolidation should serve as good news for some of the established startups in the industry such as mPayy, Moneta, eBillme and Secure Vault Payments, among many others. These firms could well find themselves getting some overdue attention in 2010 as alternative online payments continue to gain currency.

Should Cisco dial up eBay’s Skype?

Contact: Thomas Rasmussen

In eBay’s recent report on second-quarter results, the online auction house announced a somewhat disappointing performance in its two core businesses, Payments and Marketplaces, but did see strong results from a surprising source: Skype. The VoIP service increased year-over-year revenue by 25%, while overall sales declined as the legacy Marketplaces revenue sank 14%. Skype revenue hit $170m in the quarter, bringing sales for the division over the past year to $587m. The service is closing in on a half-billion users, finishing June with 481 million users. All in all, that’s a solid performance for a unit largely considered the bastard child of the Silicon Valley auction giant.

However, that certainly isn’t enough to keep Skype inside eBay. The acquisition, which eBay has admitted overpaying for and has written down a huge chunk of the $3.2bn cost, remains largely irrelevant and immaterial to its core e-commerce business. The service has never been integrated into auctions – much less adopted by buyers and sellers – at a level anywhere close to what was planned when eBay picked up Skype four years ago. It stands as the company’s largest-ever purchase and a stark reminder of an ill-conceived deal by the earlier leadership of Meg Whitman. Current CEO John Donahoe has been clear that eBay is returning to its roots, and Skype won’t be a part of that.

So where will Skype go? We see the VoIP vendor on a dual track. It could well get spun off in an IPO. (Provided, of course, that the catastrophe at Vonage hasn’t poisoned the market for VoIP companies.) Or, Skype could look for an acquirer, although we wonder how deep the pool could be for potential buyers that could write a $2bn or so check for it. But we do have one possible interested party: Cisco. Granted, this is a proposal from left field and we’re not suggesting that talks between the companies are going on or anything. However, there is some indication that such a pairing might not be too farfetched. Cisco has increasingly been bulking up its consumer division and its strategy around the media-enabled home is finally starting to come to fruition. Video plays a big part of those plans, and the firm has been talking about expanding its TelePresence offering from the enterprise to the home. An acquisition of Skype with its enormous and growing user base and proven technology on desktops and mobile devices would do just that, and would fit well with its M&A strategy of picking up market adjacencies.

Will mobile payment startups pay off?

-Contact Thomas Rasmussen, Chris Hazelton

In 2006 and 2007, mobile payment startups were a favorite among venture capitalists. The promise of dethroning the credit card companies by bypassing them had VCs and strategic investors throwing hundreds of millions of dollars after such startups. During this time, a few lucky vendors managed to secure lucrative exits. Among other deals, Firethorn, a company backed with just $14m, sold to Qualcomm for $210m and 3united Mobile Solutions was rolled up for $70m as part of VeriSign’s acquisition spree. Recent prices, however, haven’t been anywhere near as rich. Consider this: VeriSign unwound its 3united purchase last month, pocketing what we understand was about $5m. Similarly, Sybase picked up PayBox Solution for just $11.4m, while Kushcash and other promising mobile payment startups have quietly closed their doors.

Last week, Belgian phone company Belgacom took a 40% stake in mobile payment provider Tunz. Tunz has taken in a relatively small $4m in funding since launching in 2007, but with VCs sidelined, we believe this investment was a strategic cash infusion to keep alive the company behind Belgacom’s mobile payment strategy. It may well be a prelude to an outright acquisition. With valuations clearly deflated and venture capitalists nowhere to be seen, we believe mobile service providers are set to go shopping for payment companies. Who might be next?

Yodlee, mFoundry and Obopay are three companies that have made a name for themselves in the world of mobile banking and payments. Each has secured deals with the major banks and wireless companies, but still lacks scale. Further, all of them are facing increased competition from deep-pocketed and patient rivals such as Amazon, eBay’s PayPal and Google’s CheckOut. Still, we believe they are attractive targets for wireless carriers or mobile device makers, who are increasingly on the lookout for additional revenue streams.

In fact, Obopay received a large investment from Nokia last week as part of its $70m series E funding round. Nokia’s portion is unclear, but Obopay tells us the stake gives Nokia a seat on its board. (Additionally, we would note that this investment comes directly from Nokia, rather than its venture arm, Nokia Growth Partners, as has typically been the case). This latest round brings Obopay’s total funding to just shy of $150m. Although we wonder about the potential return for Obopay’s backers in a trade sale to Nokia, the mobile payment vendor would clearly be a great complement to Nokia’s growing Ovi suite of mobile services. (We would also note that Qualcomm put money into Obopay and considered acquiring the company, but instead went with Firethorn.) Likewise, Yodlee and mFoundry’s roster of strategic investors and customers reads like a short list of potential buyers: Motorola, PayPal, Alltel (now Verizon), along with other large banks and wireless providers. Yodlee says it has raised more than $100m throughout its 10-year history, and mFoundry has reportedly raised about $25m.

Returning to eBasics

-by Thomas Rasmussen

Despite its stock trading near a five-year low and plans to cut 10% of its workforce, eBay managed to go shopping last week, picking up a pair of companies for a total of $1.3bn. The auction giant spent $945m on Bill Me Later, an online payment processor popular among big-ticket retailers, and $390m on Danish classifieds giant Den Bla Avis. The acquisitions mark a return by eBay’s recently appointed CEO John Donahoe to a focus on the company’s core operations. It also brings into sharper relief the largest strategic misstep by Donahoe’s predecessor Meg Whitman: the purchase of Skype. We believe that will soon be remedied, with the newly refocused eBay divesting its communications division.

It’s clear why eBay would want to return to its roots, and why the Bill Me Later acquisition makes a lot of sense. (The purchase of Den Bla Avis is another step in the company’s international expansion strategy.) Bill Me Later is a complementary acquisition to eBay’s PayPal payments division, which unlike the Skype acquisition has paid off handsomely. The payments segment now represents more than 25% of total revenue, or $2.2bn for the past 12 months, while Skype only brought in about $475m, or roughly 6% of total revenue. (Remember that eBay paid just $1.5bn for PayPal but handed over $2.5bn for Skype.) So who might want to pick up the Skype business?

Just because eBay has struggled to realize a return on its acquisition of Skype doesn’t mean another owner, particularly one focused on communications, couldn’t do well with the property. With about 340 million registered users, Skype is the undisputed leader in VoIP. That commanding market share is likely to attract attention from the existing telcos. It is particularly enticing once you factor in what is happening in the mobile space right now and Skype’s position to dominate mobile VoIP. So far, the wireless telcos have been fighting to keep Wi-Fi, VoIP and other services they do not control or profit from off their handsets. This is a battle they are quickly losing (case in point: Android, BlackBerry and iPhone). Much in the same way that the legacy telcos were quick to adopt wireless technology when it was still in its infancy rather than cling to the wires, it makes sense to try to profit from the trend rather than fight it. Another likely bidder for Skype is Nokia, which has been an avid acquirer of mobile content in its bid to move away from strictly hardware. In addition, Google, Microsoft and Yahoo might consider picking up Skype, since all three of these companies have used acquisitions to enter the emerging mobile communications market.

Performance of select eBay acquisitions

Date of acquisition Target Deal value Current TTM revenue Current revenue to deal value multiple
September 12, 2005 Skype $2.5bn $475m 5.2x
July 8, 2002 PayPal $1.5bn $2.5bn 0.6x
October 6, 2008 Bill Me Later $945m $130m (projected for calendar year ending December 31) 7.2x
October 6, 2008 Den Bla Avis $390m $58m (reported) 6.7x

Source: The 451 M&A KnowledgeBase